Over the next year there
will be a great deal of scrutiny around the implementation of Obamacare. Healthcare affects everyone, and no one will
be left out, from the enrollment process to the delivery of care. There will be less discussion around the impact
of Dodd-Frank as the major implementation dates approach. Most Americans do not work at a hedge fund or
a financial institution, so the direct impact of implementing an overwhelming
set of regulations will be less obvious.

Nevertheless, it is all about
the “unintended consequences” that will impact Americans, even though they
cannot put a legislative tag on it.
Potential consequences don’t relate to the need for visibility around
derivatives – especially those that are based on the value of mortgage-backed
securities. Where the consequences are
less clear and less predictable are those that emerge from the more ad-hoc rule
based responses to financial crises. The
powers afforded regulators directly tie to the experience of the Lehman
collapse.

The Lehman bailout was
followed quickly by the Bear Sterns bailout, setting up unreasonable
expectations that the government would bailout any big financial institution, and
was further supported by the bailout of Fannie Mae, Freddie Mac and AIG. Dodd-Frank still requires special treatment
of the largest financial institutions, offering the ability of banks to borrow
money at lower rates than smaller banks.
This has led to a flurry of activity around the purchase of smaller
regional banks by larger firms. So
rather than encouraging the break up of the larger institutions, Dodd Frank has
encouraged consolidation.

Even
though unintended consequences are, by definition difficult to predict, the
following are some that are being realized:

Fewer and bigger banks: Because of the costs of Dodd-Frank compliance,
banks will have more incentives to consolidate into the “too-big-to-fail” banks
the bill was designed to eliminate.

Higher consumer costs: With higher regulatory costs, banks are hiking
fees elsewhere. It is becoming more expensive for consumers to use banks.

Fewer mortgages: With Dodd-Frank and pressure to buy back bad home
loans, big banks are becoming increasingly inclined to pull out of the mortgage
business.

Tighter trade credit: Dodd-Frank provision requires banks to comply with
new liquidity and capital standards, including backup liquidity lines. This may
have a negative effect on the ability of banks to extend trade credit and thus
impact the economy.

The
unintended consequences are similar to the US tax code, with all of its
complexity, leading to unnecessary overhead and additional cost passed on to
the consumer. Banks will be forced to charge
higher rates on loans to recoup their costs, and add more fees or reduce their
profits.

Dodd-Frank
is destined to fail in preventing the next financial crisis. The law doesn't address what many regard as
key culprits in the financial crisis — the roles of Fannie Mae and Freddie Mac,
the credit ratings agencies and the fact that the financial system is more
consolidated than ever in the hands of a few “too-big-to-fail” banks. Ultimately it will have to be amended to deal
with the large number of “unintended consequences.”